By Ray Birch
CLAWSON, Mich.—Did Partner Colorado CU make a bad deal selling its cannabis banking CUSO to a SPAC and--at least for now--getting far less than the near $200-million selling price, or will it and its members eventually see that money? There is no way to know, at least in the near term, according to one neutral third party.
As CUToday.info reported in some detail here, a review of the deal by Chip Filson found the sale of the CUSO, Safe Harbor Financial, which pioneered the providing of financial services to cannabis businesses, has generated significantly less cash for Partner Colorado than had been originally agreed to and even caused the credit union to report a loss.
Filson, who previously served as NCUA’s Director of the Office of Programs (CLF, NCUSIF, and Examination Policy) and later helped to start Callahan & Associates and remains active in various credit union issues, published his analysis on his blog.
The SPAC, also known as a blank check company, New York-based Northern Lights Acquisition Corp., was to pay $70 million in cash and $115 million in stock for the CUSO, Safe Harbor Financial Services. But the company’s stock has plunged from a peak of over $10 per share in October 2022 to close at $.39 recently, and the $700-million Partner Colorado Credit Union, which was the founder and owner of the CUSO, recorded a $44-million dollar loss in the March quarter, to offset the gains from the sale recognized in the 4th quarter of 2022, Filson was first to report.
The credit union has since taken on more than 20 million shares of stock in the company, which is now known as SHF Holdings.
‘Somewhere in the Middle’
In an interview with CUToday.info, Partner Colorado acknowledged the deal did not go as planned, but it is counting on an increase in the stock price to help it see the $185 million it was counting on from the sale.
Now one financial markets expert who is very familiar with SPACs says the answer to whether the deal is ultimately good or bad for the credit union, at least for today, should be somewhere in the middle.
“It's easy to take any data set and put your opinion on it,” said Charley McQueen, president and CEO of McQueen Financial Advisors. “Look at our politicians, where we're calling legislation a spending bill deficit reduction act when the bill is doing nothing but growing the deficit. Things can be spun any way possible. What can't be spun is looking at someone's audited financial statements two to three years down the road and seeing the outcome.”
Lack of Data
McQueen believes it’s difficult at present for anyone to take sides when it comes to the deal Partner Colorado made.
“Again, we don't have enough data yet,” he said. “I don't know which side of the story is correct. I definitely think there are some numbers being pushed in different directions and comments made that take each side of the story. But I think the big lesson in this should be is this the right way to go public with the entity you're taking public. And you should always look at all different ways to go public if you want to or sell and liquidate and make sure that you're going down the most efficient path to get the best outcome you want.”
As Filson noted in his analysis, “Within 90 days of Safe Harbor, (Partner Colorado) Credit Union’s CUSO subsidiary, becoming a public company, the December 2022 financial result reported negative retained earnings of $39.7 million. The company’s stock has fallen from a peak of over $10 per share in October 2022 to close at $.39 (last week). Auditors have raised a going concern footnote as a result of its December financial position.”
Charley McQueen
The Credit Union Responds
In response, Partner Colorado CEO Doug Fagan told CUToday.info he expects the deal, as well as the story itself, to eventually end well for the credit union and its members.
He blamed a stock market decline he said occurred after the agreement was signed to sell the CUSO to having led to investors backing out of investing in the SPAC.
“This looked like a good opportunity to investors before the market crashed,” explained Fagan. “But when the market crashed things changed dramatically. Many investors pulled out of the SPAC, because they did not want to invest in anything when stock prices are falling. That left far less money to pay the credit union.”
In addition, Fagan told CUToday.info the numbers don't tell a complete story.
“It’s easy to just look at the numbers here, and if you don’t know the backstory it looks like a deal that has gone bad,” acknowledged Fagan. “This is not a simple story to tell—just by looking at the numbers.”
McQueen believes a SPAC is a good tool. A SPAC raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company.
‘Every Deal is Different’
“Almost every SPAC is different, including the details and the structure,” explained McQueen, who said it is difficult to discern if investors pulled out of the Partner Colorado deal due to the stock market’s decline, but agreeing he has seen that happen before. “Every SPAC has a different operating agreement. For any outsider to pass opinion on this deal is fairly risky, because you need to read the details of the SPAC to understand the deal that was made. For us just to judge looking at this deal off of one or two quarters of numbers could be very dangerous. So, it could be a good deal, it could be a terrible deal—time will tell.”
In an interview with CUToday.info at the time of the sale, Sundie Seefried, CEO of Safe Harbor Financial and the former CEO of the credit union, said, “We've done this for our members. They took the risk with us and hopefully they're going to be rewarded for it.”
Fagan said he expects members someday will receive a payback despite the current rock-bottom stock price.
“That is still our intention,” stressed Fagan. “We do own 22.5 million shares of Safe Harbor Financial Services, and as the stock price increases and get we'll eventually get out of that ownership position and sell the stock and get the cash. We'll figure out a way to give money back to the members who took the risk with us.”
Many Factors at Work
Could Partner Colorado see the full $185 million it anticipated receiving when it closed the original deal, especially given the sharp plunge in the stock price?
“Where a stock trades at any given time is based off of many things,” McQueen said. “Some of it is based on facts. Some of it is based on rumors. Some of it is based on momentum trading. Tesla, which was down 50% in value four months ago, is back up now to where it was before. It's up 100%. Is Tesla fairly valued now, or was it fairly valued at 50% of that value?”
Similarly, tech company stocks are typically valued on projected earnings looking forward.
“They could be losing millions of dollars a year but the stock is worth billions,” he said. “It's a perception. It's expectation of forward revenue. Where (Safe Harbor Financial Services) is today with the value of its stock, it could definitely come back. I don't know the assets of the company, the revenue stream of the company…”
Skills in Place?
Asked if credit unions lack the necessary internal skills and experience to get involved with a SPAC, McQueen emphasized that taking a private company to the market is not easy.
“I've never done it—taking a company through an IPO. I've watched friends do it. It's a very difficult process,” he said. “I've also had friends that have taken their mortgage companies through SPACs that have been very successful. I don't know that we have enough details to judge whether the credit union did the right or wrong thing. I think reading the other financials over the next two or three years will probably give us the answer. Nothing against the credit union, but these are very complex transactions and the devil is in the details and in making sure that you have good representation.”
The Value of Good Counsel
McQueen noted, for example, he has worked on a number of deals involving acquisitions of banks by credit unions, often working with the pioneer of such deals, Michael Bell, a partner and co-chair of the Financial Institutions Practice Group at Honigman, LLP.
“Working with an extremely highly skilled attorney versus an average attorney is massively different,” said McQueen. “We'd like to believe that working with a good financial advisor is going to give you a massively different outcome versus just an OK financial advisor. A lot of people don't understand the value that comes with good representation. So, whenever you're doing a transaction, it's extremely important that you're not going after the cheapest person out there—you're going after the person with the most relevant skill and the person that's going to help you achieve the outcome that you're looking for in the best possible way.”